Greek Contagion
Research for Online Investors

by John Dalt

10/11/10

Greece will be rescued from their credit crisis by other members of the European Union, Reuters reports. Greece’s deficit is running at 12.7% of GDP this year. Greece needs to borrow over $75 billion to cover their deficit and refund loans coming due. Their total debt will reach $420 billion, or 120% of GDP this year.

Who will rescue the U.S. when we succumb to the contagion of spending money we do not have?

Why did the EU countries come to the rescue, what did they demand in exchange, and what are the immediate results? The details are not out yet, but rumors circle around a few areas. Athens has pledged to cut its deficit by four percent this year. They must increase official retirement from 61 to 63 years of age, freeze public sector wages and hiring, ban early retirement, increase the top tax rate to 40% on incomes over $84,000.  They are considering a tax amnesty for tax cheats. It is estimated that over 25% of the economy is done in the ‘black market’ to avoid taxes.

Greece has one of the lowest birthrates in the EU, and generous pension benefits.  The average birthrate in the world is 20.3 per 1000; Greece’s birthrate is less than 10.  They face a smaller workforce paying for pensions.  Unemployment is at the highest levels in five years.  Unions are calling strikes to protest the austerity measures, while 64% of the public accept the necessity of making the above changes.

Germany and France are leading the effort to support Greece.  Spain, Portugal and others are weaker, and if the contagion spread would be on the food chain.  The Euro as a currency was created eleven years ago, and this is the first time a member state has been bailed out.

The actions taken by Greece are instructive, because the U.S. is heading down the same road. The only difference is we have the ability to print money. Paper money only has worth if others feel it is a reliable store of value. When confidence is shaken in lenders minds, what will happen in the U.S?  Below is the 2009 fiscal year pie chart of the federal budget.

Every 1% increase in interest rates adds $147 billion to annual interest charges.

What are the similarities?  U.S. birthrate is just under 14 per thousand.  U.S. has an ‘official’ retirement age of 65; but early retirement benefits are available at 62.  Life expectancy has increased by eight years in the last six decades, but the average retirement has occurred two years earlier.  Our budget deficit is 10.6% of GDP.

Last year’s U.S. GDP was estimated at $14 trillion dollars. Last week the congress raised the U.S. debt ceiling to $14.3 trillion. This does not include unfunded entitlements, now estimated at over $60 trillion! Our public debt now equals 100% of GDP with over four times more due in unfunded mandates. The treasury department estimates Social Security and Medicare outlays will be larger than the present federal budget in the coming years. Our unemployment is the highest since 1983.

Last week Moody's warned the U.S. credit rating may be in danger if the government does improve its finances.  Treasury Secretary Tim Geithner emphatically said the U.S. "Will never lose its sterling credit rating" on a Sunday talk show.  You know a government official is lying when he makes a emphatic statement on a subject he has no control over.  We are teetering on the edge, now.

We reported Monday that Switzerland’s Zug canton offered Diageo Executives tax breaks if they moved their headquarters from London. Yesterday, Diageo’s CEO, Paul Walsh, warned the U.K. it was “very difficult” to employ staff in the UK where personal tax rates are as high as 50%. You can read the BBC article, Diageo hits out at UK tax regime.

There is really only one way to balance a budget, cut spending.  All others lead to economic ruin.

"The budget should be balanced, the Treasury should be refilled, public debt should be reduced, the arrogance of officialdom should be tempered and controlled, and the assistance to foreign lands should be curtailed lest Rome become bankrupt. People must again learn to work, instead of living on public assistance." --- Cicero - 55 BC

I bet Cicero and all Romans wished they had listened.  Historians estimate that 20% of the population of Rome became freeloaders that lived off the state.  Rome’s population fell after the wealthy residents refused to support them any longer.

49% of U.S. residents currently receive government benefits.

The information presented in this newsletter is based on generally available news releases, corporate filings, current events, interviews and the editor’s opinions.  It may contain errors and you should not make investment decisions based solely on what you believe you have read here.  Do your own research, it is your money.  If you lose it, it is your responsibility, not ours or your grandmothers!  The editor may or may not have a position in any securities discussed.  The editor may have held a position in a security earlier, or in the future.

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